China Focus

A New Business Model

By Dr CS Lim

THERE ARE SOME GROUPS OF
NUMBERS WORTH PONDERING
OVER.

First is the per capita consumption of furniture
from different countries:
Germany: 390 Euro per year per person;
U.S.: 210 Euro per year per person;
Russia: 70 Euro per year per person;
China: 44 Euro per year per person.

The above data comes from the Germany
Furniture Association. It demonstrates that
Germans have the highest per capita spend
for furniture, which is nine times more than the
Chinese. This amount is also higher than the
Americans. Perhaps the Americans are more
geared towards the lower prices while the
Germans seek higher-quality products.

The most interesting thing about the data is
Russia’s higher per capita consumption in
comparison to the Chinese, rather unexpectedly.
Taking a look at the furniture market of Russia,
we can see that in Russia most of the furniture
are imported either from the former eastern bloc
countries or Asian countries like China. Prices
of furniture in Russia is naturally higher than
that in China taking into account the freight,
import duty and importers’ profits.

In any case, the Chinese furniture consumption
still stand at a low level due to the following
reasons:
1. Consumption habit. The Chinese are not
used to replacing furniture frequently except
when moving to a new house or preparing
for marriage.
2. The supply exceeds demand in domestic
production, thus the market price is
depressed.
3. The per capita income is rather low in China,
which is the equivalent of one-eighth to
one-ninth in developed countries. As such,
consumption is consistent with income.
4. Inadequate urbanization. Industrialization
goes hand in hand with urbanization but
although the industrialization rate nowadays
has gone beyond 65%, urbanization lags
behind at about 50%. The consumption of
furniture in rural area is much smaller than
that in urban area.

From the data of per capita consumption, we
can calculate the scale of the furniture markets
of the various countries.

Germany: with a population of 80.8 million
has a market of €31.5 billion (the equivalent of
RMB236.3 billion).

Russia: With a population of 143.7 million has a
market of €10 billion (RMB75 billion).

China: With a population of 1.3 billion has a
market of €57.2 billion (RMB429 billion)

It is US that still takes the lead as the largest
furniture market in the world, with €10billion
(RMB70 billion) more than China. From this, we
can make many interesting observations. Here
let’s focus on production and marketing.

Industrial Production
According to various reports concerning the US
furniture market, half of its furniture is imported
while the remaining half is produced locally in
the US. But according to an IBIS world industry
report, the revenue of America’s furniture
industry in 2014 reached US$25.5 billion
(RMB158 billion), which was less than half of
China’s.

Imported furniture accounted for 66% and
domestic production accounted for 34%.
However I would assume that the actual import
volume to be more than that. This is because
with imports, the goods may be reclassified as
locally manufactured so long as they are not
completely finished. For example, if a table
is not assembled with a top or if some small
components are added in the US. As such, I
would estimate the amount of US domestically
manufactured furniture to be just 20%.

Even with twenty percent, their per capita
productivity is still high. There are only 4,900
furniture factories in US, in which there are
1.2 million employees (source: Chen Jiaan,
US Furniture Industry Analysis, Woodworking
& Furniture Digest 360th edition). The output
value is RMB90 billion. I am skeptical about
such high productivity.

Furniture Marketing
Here I refer to the domestic market. First let’s
have a look at the sales through furniture stores
in the U.S.

We measure the performance of retail stores
using the following standards:
1. Profits: usually 46%-48% gross profit.
2. Inventory turns: about 5-6 times.
3. Per square meter sales: average RMB25,000
per square meter per year.

Therefore, the total retail area in US is supposed
to be 2.5 million-3 million square meters.

The gross profit of China’s furniture stores is
45%-50%, identifcal to that in the America.
However the rent in China is much higher than
that in the US. Besides, it is low in per square
meter sales, thus the net profit is much lower,
so much so that many stores suffer losses.

In China most of the statistics are estimated. If
there is only RMB429 billion in our market and
divided by so many stores, each square meter
will achieve an annual sales of less than 4,000
yuan. It is little wonder that stores loses money
with such low sales numbers.

Even if we use an estimated RMB600 billion for
calculating the Chinese domestic sales, each
square meter will have achieved sales of 6,000
yuan, which amounts to one-fourth of America’s
per square meter sales. Outlets in China still
suffer losses.

However, more stores are being built in China.
It is said that the total has exceeded more
than one hundred million square meters. If
the expansion continues, the retail market will
face further dilution. Both retailers and mall
operators will suffer great losses.

The €44 (RMB 330) per capita consumption in
China refers to the retail price. If it is converted
into ex-factory price, then the domestic sales
would be RMB300 billion. Adding that amount
to the export sales of less than RMB300 billion,
the surplus output would be staggering if the
total output value is really in the trillions as
estimated by the Furniture Association.

These numbers really ought to be straightened
out.

DR LIM CHEOK SIN
President, Council
of Asian Furniture
Associations
Professor, Beijing
forestry University
, currently the
Chairman of the
Council of Asian
Furniture Association
(CAFA). He read at
Nanyang University
in Singapore and
completed his PHD
at Beijing University
of Forestry. He holds
a Post Doctorate
from Michigan State
University and is a
visiting scholar there.
Dr Lim has been active
in the Singapore
furniture industry,
chairing both the
Singapore Furniture
Association and
Furniture Association
of Asia and Pacific
previously.

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